Advisers brace for client backlash on risk profiling

Australian wealth managers anticipate an imminent surge in compensation claims from clients due to failure to comprehend risk suitability, and expect tougher regulation to follow, new findings from Oxford Risk have suggested. 

Namely, in the study of wealth managers who collectively manage assets of around $232 billion, 58 per cent said they believe there will be pressure over the next five years to compensate clients for not doing enough to understand client risk suitability.

Moreover, more than three-quarters (77 per cent) of respondents also expect firmer regulatory action over the next five years, which, according to Oxford, increases the need for wealth managers to better understand risk tolerance and suitability.

Speaking on the findings, Oxford Risk Australia head of client and strategy Bianca Kent said: “There is a widespread expectation from wealth managers that there will be tougher regulation on the issue, and we would urge them to act now and get ahead of any changes in regulation.”

As such, Oxford Risk said wealth managers and financial advisers would likely benefit from better systems and tools to support clients, especially amid the financial impact of COVID-19, rising inflation, and high levels of volatility.

Ms Kent agreed that investment markets have been highly volatile over the last three years, adding that many clients will “inevitably be disappointed with their returns”.

“It is worrying however that so many wealth managers fear they will face compensation claims over their advice and particularly worrying that it will focus on a poor understanding of client risk profiles,” she added. 

Furthermore, the study by Oxford revealed that a substantial 68 per cent of wealth managers were occasionally caught off guard by their clients’ investment decisions, with the most frequent mistakes being evaluating returns over a short period (36 per cent).

Other common mistakes included impulsive decisions to the detriment of short-term plans (35 per cent) and buying high and selling low (34 per cent).

Last month, Oxford Risk also revealed that helping clients manage their emotions has become a key component of an adviser’s role, with 76 per cent of wealth managers saying their clients regularly make investment decisions based on their emotions.